Pranabda screws the Big B !

Hold on....the title doesn't have anything to do with Mr.Bachchan.

A few days after being sworn in as the new Finance minister every news channel and all market participants had hyped up the next budget as the biggest ever. CNBC, my favourite channel, called it the Big B (B obviously standing for Budget). For those who remember, the markets rose 17 odd % the day they opened after the Congress Govt.came to power. This was obviously due to the over confidence that all India's problems would be solved very soon. Expectations with the first budget were sky high. Every possible good was already priced into the stock prices. It needed a budget tad below expectations to prick the inflated balloon and that's exactly what Pranabda delivered.

Within a short time into the budget speech the markets started tanking and by the end of the day had shed about 6% or so falling 870 points, going from near 15000 levels to near 14000 all in the span of 1 day ! What did Pranab Mukherji do so wrong? Well....he didn't do much and that was what was wrong. All the expectations came crashing down and realisation dawned. All of a sudden the gung ho sentiment has vanished and pessimism has set in.

I had posted on valuation here during the elections and had indicated the fair value for the Sensex to be 12450. However, the fundamentals have certainly changed over the last month due to the formation of a stable Govt.at the centre. I do expect reforms to kick in, although more gradually. I do expect corporate earnings to improve thereby giving it a premium valuation as well. This means a higher PE multiple (remember 1PEG). Higher the earnings higher the multiple. Speaking in numbers it would work out like this (approximately) - As per http://www.bseindia.com/ the current Sensex EPS is 762 and the Sensex trades at a PE multiple of 18. This multiple seems high with earnings still not growing at 18 times. Therefore a fair multiple would be 16 giving the Sensex a fair valuation of 12192. However, given that the earnings are expected to rise between 15%-20% in the future the Sensex FY10 EPS should be between 875-915. Considering this the Sensex should trade between 13145-18288 by the end of March 2010. If things work out good and the steps taken by the Govt.does help accelerate growth we will end up closer to the higher end. That would certainly be terrific given where we are presently.

Sell sell sell (for the time being)

The Indian markets are on fire again. The sensex has gained over 50% in a span of about 3 months. This rise has followed a disastrous year for equities of course. There are normally three factors that people track to buy or sell in the markets.

One is fundamental. This is the basics of the business....how a company's doing, are the sales rising/falling, are the profits rising/falling; how the sector is doing and in general how an economy is doing. The second reason is technical. This is more got to do with numbers than anything else. This basically considers different period moving averages. For example the 200 day average, 50 day average, etc. This is used mainly by traders. I have never understood how this works. But there are pundits who swear by this method and I'm sure this is something that cannot be totally ignored. The third category is the herd mentality. Market seems to be going up today so lets buy some scrips. The best example is the Reliance Power IPO. Everybody just had to apply as everyone else was. I too was enamoured by the idea of listing gains and got into the trap.

As for any product we have to also make an informed judgement while buying a stock. Unfortunately, there are no set parameters using which we can make that judgement. Each individual decides the value of a company and buys accordingly. There are a few simple terms commonly used like -

EPS - Short for earnings per share. This is the total profit earned by a company divided by the total number of shares. For example if a company earns Rs.1000 and the number of shares it has it 200 then the company has an EPS of Rs.5

PE - This is the ratio of the current market price to the earnings per share. If a company earns Rs.5 per share and is trading at Rs.100 then it has a PE ratio of 20 (100/5)

PEG - This is the ratio of PE to growth in earnings of the company. For example if a company earns Rs.4 in 2007, Rs.5 in 2008 the growth in profits is 25%. If the PE for such a company is 20 then it has a PEG of 0.8 (PE/Growth - 20/25)

The knowledgeable use these basics to value a company. Other things remaining constant a company generally is bought at PEG less than 1 and sold if PEG is more. However, this is a barometer using past figures in mind. Things could be different in future due to which many other factors that could affect a companies' performance has also to be considered.

As per http://www.bseindia.com/ the Sensex companies have an earning of about Rs.720 for FY(financial year) 08 and the index trades at about 16 PE. This means 16 times the combined earnings per share of Sensex companies. As per most brokerages the earnings of these companies would increase between about 10%-15% (best case) in FY09. This would bring the earnings to about Rs.790-830 per share. Going by the theory of 1PEG the fair value of the Sensex should be between 7900 to 12450. The Sensex has almost hit the upper end yesterday. Besides, the external factors also would play on sentiment. The elections are expected to present no clear winner. There is a good chance that the left parties and/or Mayawati's BSP would play a crucial role to form the next Government. This would certainly spell trouble. Uncertainty is something the markets don't like. Given this scenario I feel the markets are going to go down from here and based on the election results make the next move.

Go out there and BUY !!

I have never claimed to be a master of the stock market. I do my little bit and keep in touch with whats happening around though.

Over the last year or so, markets all over the globe have been battered down. Blue chips have also been beaten down to the extent of 70-80% from their peaks. While there are some pointers to justify a fall, there is absolutely nothing to justify this kind of a fall. Agreed there is a liquidity crunch, manufacturing has slowed, demand has slowed, jobs are being lost, etc. However, there is a silver lining in all this.

The crux of the problem, the US banking system, has learnt a bitter lesson they would never forget. They are being over cautious presently, which is understandable. One must understand that they are banks and they MUST lend to make money. The federal banks across the world have taken bold steps and injected big money into the system. This will ease concerns of banks which will sooner or later result in money flowing into the hands of the genuine borrowers, which to a large extent are corporates. Most companies, have put on hold or shelved expansion plans due to the volatile environment. With availability of credit back many would take advantage and resume their plans, if not to the extent earlier planned. This directly creates jobs, which ignites spending and gets the growth of economies going.

Coming back to stocks, there is a difference between a broken down stock of a broken down company and a broken down stock of a good company. Stocks are just a value that an investor is willing to pay for a portion of a company. As indicated on my earlier blog, stock prices quote many a time at irrational levels, not reflecting their fundamentals. We, in India got a glimpse of extreme greed in January when the sensex touched the 21000 level. Over the last 11 months, this extreme greed turned into extreme panic. A classic Warren Buffett scenario. Not surprisingly, the Oracle of Omaha went and picked up a chunk of Goldman Sachs. Indian stocks are overly dependant on foreign institutional investors. Unfortunately, owing to the collapse of their respective institutions in their home markets, these institutions were forced to sell left right and centre to get cash. At the receiving end were stocks of great companies.

We all know, the Indian story is still on. While the world worries about recession, India is expected to grow between 6.5% (most pessimistic opinion) and 8.00% (most optimistic opinion). This is the sort of growth that investors go after. When the dust settles and people start acting rationally India will be one of the biggest benefactors. India, unlike any other major economy, has several things going for it. Being a major importer of commodities, declining prices results in huge savings. Strong domestic demand and lesser dependence on exports augers well in the recessionary atmosphere abroad.

Stocks are trading at historically low levels. This means lowest price to earnings ratios (PE) are the lowest in years. This is the time for those who do not have much of an exposure to enter for a long run. At these levels the risk-reward scale tilts fully in favour.

The storm has settled. It is time to rebuild !

Most Admired Business Leader

The global economy, it seems has collapsed. There is gloom and doom on every corner. However in the Indian context we have seen a few wonderful business leaders that instill confidence in the stake holders of their respective companies.

I have jotted down a few from that lot and invite you to vote for your most admired leader in the following week.

First from the lot, ofcourse in random order is Mr.Mukesh Ambani who is shaping the Indian dream in petrochemicals, oil refinery, retail, etc. The Reliance group employs the most number of Indians either directly or indirectly. I remember one analyst comment recently that if Reliance sinks then it would mean a Good Bye to the entire Indian economy.

The next leader that comes to my mind is the firebrand and aggressive Anil Ambani who has turned the Anil Dhirubhai Ambani group into a financial powerhouse. The stock price of any company that Anil Ambani invests into surges as the news leaks out. He has given the most in turns of returns to investors in his group. While there has been a bad taste to several investors in the Reliance Power IPO, his name still generates tremendous confidence.

Moving on to Mr.Ratan Tata who can no longer be called only an Indian business leader. Under his able leadership, the Tata Group has ventured out all over the globe buying companies everywhere, at times companies thrice the size of the buying entity. With businesses spread into industries such as Steel, Autos, Software, Hospitality, Tea, Chemicals, etc.there is a lot that is at stake for Mr.Tata, who has made Indians proud the world over.

Finally, I must mention Mr.Narayana Murthy who has taken the Indian software company Infosys from scratch to be one of the most respected companies in the world. People hold the shares of Infosys with a lot of pride like some sort of a trophy. Mr.Murthy developed Infosys with a lot of integrity and dedication. Inspite of the fantastic growth of his company, he lived a very simple life which has inspired millions of Indians.

In today's turbulant times, we need more of such leaders to make the Indian economy stronger and more resilient to any future crisis.

Stock Market and the Casino !?

Its very facinating to see the movements in the stock market (Indian). I feel I am well informed and in tune with everything. But.....can anyone claim that ?


There was an expert who had done some analysis and stated that historically in any given 5 year period the stock market has always been the best performing asset class. For those who want simpler lingo....asset class means any form of investment that gives returns. I will wait for another three years before writing to that gentleman that his theory is a piece of shit ;) Although I do feel he is right.

Where the heck if the other part of the title linked to the topic ? Well my dad used to say that stock investment is just 'satta' or gambling. He used to be a day trader and never really invested or researched a company before trading. He used to go to our broker, look at the screen and buy anything that was going up and sell it immediately after the price went up a little more after he bought. Well, obviously this method could work on a few days but then days like those would always be just that - FEW. Over the last year however, I have been successful in changing his opinion. He has begun investing in certain companies that have good potential over the long term.

There are somethings all of us (aam aadmi) should learn from the few intelligent and sane investors out there. One gentleman a while back stated - Be greedy when everybody is scared and be scared when everybody is greedy ! In other words, when you see every single person you know or don't buying stocks of a company its time you stay away or better still, sell. A classic example would be the Reliance Power IPO - whole world knows what happened there. It became Power OFF toh India OFF !! Just to inform you the name of the gentleman whose great words I have mentioned above is Warren Buffett.

Until next time....happy investing !!